Mr Lamont's dark history

His time at Number 11 ended in ignominy after Black Wednesday. But now John Major's first Chancellor argues that the rapid and stormy departure from the ERM was a good thing for Britain, writes William Keegan

Norman Lamont was the most obvious political casualty of Black Wednesday. As Chancellor of the Exchequer and Prime Minister, Lamont and John Major together presided over the fiasco of our membership of the European exchange rate mechanism being officially 'suspended'. Lamont offered to resign at the time - but 'not too insistently', according to a member of the Major camp. The following spring, the Chancellor was sacked from the Treasury.

Major offered him the post of Environment Secretary. There is a passage in Sir John's memoirs that made me sit up: on being offered Environment, plus continued use of the Chancellor's country residence, Dorneywood, Lamont declined. In Major's words: 'It was a stilted series of exchanges that illustrated the chill that had descended upon our relationship.... "Yes, Prime Minister." "No thank you, Prime Minister." "I wish to leave the Cabinet" were the only words he spoke. He turned and left. We have never spoken since.'

When I went to interview Lord Lamont at the Mayfair offices of Balli Group (of which more later), the first question I was bursting to ask him was: 'Major's memoirs were published in 1999. Is it still the case that you two are not on speaking terms?'

Lamont, once a candidate for the most loathed politician in the land, is a genial person. He grinned and said: 'No. Grass grows over the battlefield. We had to talk when the Black Wednesday papers were released [under the Freedom of Information Act in 2005].'

Why did they have to talk? 'We had to see if we could agree on what to say. Then we went to lunch. All was harmony. These things run out of steam. It was a long time ago. You can't go through life brooding about these things.'

There was a time when the Foreign Office was considered the second most important post in the Cabinet. No longer: the Treasury is the place. As for the Department of the Environment - well, certainly in 1993 it would have been such a demotion that for Lamont it was an insulting offer. Part of his resignation speech still lingers in the public memory: 'We give the impression of being in office but not in power.'

But the sacked Chancellor also said: 'I have been privileged to present three Budgets. All three achieved the objectives that I set for them. The first [1991] drew the sting of the poll tax; the second [1992], by introducing the 20p income tax band, helped us to win the election; the third [1993], unpopular though it undoubtedly was, made a significant step toward reducing our budget deficit.'

He was right. The poll tax had been hugely unpopular and contributed to the downfall of Margaret Thatcher. Labour, which was caught out by the clever way in which the Conservatives made hay of John Smith's 'shadow budget' of 1991-92, were wrong-footed by Lamont's lower rate band, which scuppered their own similar proposal. The 1993 Budget, whose fiscal rectitude was endorsed by Lamont's successor Kenneth Clarke, not only reduced the budget deficit but, by so doing, gave Gordon Brown a happy fiscal inheritance in 1997.

There were wonderful echoes in Lamont's sacking of Nigel Lawson's resignation. As he told The Observer: 'When Nigel Lawson was resigning, I wrote a letter to him saying he shouldn't resign over the ERM. Indeed, Giles Radice [now Lord Radice, then a Labour MP] asked me in the House why I was not resigning with Nigel. I said, "Because I don't agree with the ERM policy".'

So why did he accept a Chancellorship whose main macroeconomic aspect, apart from normal Treasury public-spending duties, had become managing our membership of the ERM? 'I was agnostic - very mildly in opposition. After all, the ERM had existed since the 1970s and had been quite successful.'

It is an intriguing story. Lamont told a London School of Economics audience a few years ago: 'My own attitude was ambivalent. I was not involved in the decision to join.' (He was Chief Secretary to the Treasury at the time, concentrating on the control of public spending.) 'There was a very peremptory announcement at the cabinet.... The day we joined the ERM I met a senior civil servant in the Treasury and said to him, "What have we done this for?" And he replied, "Oh, for political reasons." I replied, "Well, I don't think I would like to have given up the flexibility of the exchange rate." I never imagined at that time that this decision was going to be one that would have such consequences.'

Although for many people Lamont's appointment as Chancellor was a bolt from the blue, he had in fact been Financial Secretary to the Treasury from 1986-89 and Chief Secretary from 1989-90. Indeed, he is the only person ever to have been Financial Secretary, Chief Secretary and Chancellor.

As Chancellor, Lawson had championed Lamont for promotion to Chief Secretary, although, as he says in his memoirs: 'Margaret did her best to talk me out of it.... Thus it was that, little more than a year later, Norman was in a position to run John Major's leadership campaign following Margaret's enforced departure, and to succeed John as Chancellor. If politics does nothing else, it develops an appreciation of irony.'

Many observers concluded that Lamont became Chancellor as a reward for running Major's leadership campaign in 1990, but Lamont says: 'While I was hoping I might be Chancellor, that was not why I supported John Major or ran his campaign. We never talked about it.'

For Major it was simple: of four possibilities, neither Chris Patten nor Ken Clarke had any Treasury experience. John MacGregor and Lamont were 'both credible candidates' (each having worked at the Treasury) but Lamont was still there 'and so was more familiar with current policy... The case for a familiar face known to the markets and the City was very strong.'

That policy was essentially using the discipline of ERM membership to get inflation down. Lamont became increasingly unhappy with this approach as the recession took its toll, not least toward the end, in 1991-92. He would ask senior officials 'Why are we conducting this policy?' As he recalled the other day, 'I remember saying we should suspend our membership to a senior civil servant, and he said: "This was in your manifesto in 1979, decided by the previous Prime Minister, the present Prime Minister, [and] the man who was Foreign Secretary then and now. We've been in for a year and a half - what makes you think you've got the right to abandon it?"'

Having accepted the poisoned chalice of the ERM, Lamont did not resign. I asked a senior Treasury official at the time: 'If he is so unhappy with your policy, shouldn't the Chancellor go?' To which the reply was: 'We can't afford to lose another Chancellor.'

Lamont's view is that if he had resigned immediately after Black Wednesday, Major's position would itself have been shaky. It was Major's and the cabinet's policy that had collapsed. Major told him 'You are a lightning conductor for me.'

For Lamont, Black Wednesday enabled economic policy to be rebuilt 'out of the ashes'. He did not 'sing in the bath' on Black Wednesday itself, but, asked at a press conference in Washington a fortnight later why he was so cheerful, replied: 'Well, it is a very beautiful morning, but it is funny you should say that. My wife said she heard me singing in the bath this morning.'

This remark did not go down well with the British public. Nor did 'je ne regrette rien', which was a reply the following spring, during a by-election campaign at Newbury, to the question 'Chancellor, which do you regret most, seeing green shoots or singing in the bath?'

To be fair to him, the context was the first signs of economic recovery, assisted by the lower exchange rate and lower interest rates that went with freedom from the ERM straitjacket. He had claimed to catch sight of 'green shoots' prematurely, and unseasonably, the previous autumn.

He had set in place, after Black Wednesday, the new monetary policy for which the independence of the Bank of England would eventually be the icing on the cake. As he says, 'it consisted of an inflation target, the institution of regular monthly meetings with the governor, and regular inflation reports'.

But it was no good to him personally. He was intimately associated with the second-worst recession since World War II (and the worst to hit the south). 'I remember,' he told the LSE audience, 'several years later, after I had stopped being Chancellor, I got in a taxi and the driver said, "Mr Lamont, I saved your life! I was driving up St James's Street one day and you were crossing the street and a man in the back said: Five hundred quid if you run the bastard down".'

Lamont may have sung in his bath, but he certainly did not sing in Bath, where he chaired a meeting for European finance ministers and central bank governors shortly before Black Wednesday and failed to secure interest rate cuts from the Bundesbank that might have eased sterling's position with the ERM.

'This was a last resort,' he says. 'I knew what the constitutional position of the Bundesbank was and that they were not likely to yield to our demands.' (Which, he insists, were made on behalf of many other ERM members affected by high German rates, not just the UK.)

The ERM debacle was, he accepts, 'undoubtedly politically very damaging to the government. On the other hand, there is an economically strong argument that we did get the best of both worlds - very rapid deceleration in inflation - from 10.6 per cent in November 1990 to below 2 per cent four or five months after I left office. We did that with the ERM, and, when the mechanism had fulfilled its task, it then disintegrated'. Before I could raise objections to this rather Panglossian view (shared by the Treasury's chief economic adviser at the time, Sir Alan Budd) Lamont anticipated me, saying that a more gradualist approach would have run up against political hurdles. In effect, the ERM policy about which he had such reservations and for which he suffered personally, got inflation out of the system in a way British politicians, without the straitjacket, would not have done.

I reminded him of his terrible remark that unemployment was 'a price well worth paying', to which he replied: 'The Financial Times, which condemned it, had said practically the same thing a few weeks before.' The fall in inflation 'could not have been achieved without an impact on output and jobs'.

As Chancellor of the Exchequer, of course Lamont was closely involved with Major in the Maastricht negotiations of 1991, which led to the birth of the euro, from which the Major government obtained its famous 'opt out'. I suggested that until the 11th hour the British government had hoped the single currency would be delayed indefinitely. Lamont is a diehard eurosceptic, but he said: 'John Major, who had talked about being "at the very heart of Europe", sometimes believed it wouldn't happen. I was more strongly opposed to the euro, but was convinced that it would.'

Why his certainty about continental intentions? Lamont recalled his first meeting with other European finance ministers: suddenly he was 'face to face with all these people who believed in Europe and believed in the political unification of Europe'. French finance minister Pierre Beregovoy told him his children would live in 'a United States of Europe'. Does Lamont think this is still the plan, after the French and Dutch referendums that rejected the EU Constitution? 'There is a huge political engine there. Look at the way they are pushing ahead.'

More trouble here for Cameron's divided Conservative party, I thought, while the former Chancellor continued: 'The sad thing is that the single market [always the main British project] is not much of a reality'.

Lamont is very close to David Cameron, who worked for him during the dark days of Black Wednesday and hails from a very eurosceptical background. Having earlier sung the praises of the economic policy that resulted from what some have since called 'White Wednesday', Lamont startled me again by saying: 'The other consequence was that it [the ERM affair] solidified British opposition to the euro. That, historically, may be seen as one of the major [I'm sure he intended no pun] consequences.'

One of Lamont's genuine regrets is that, in common with so many others in and around the Treasury, he had finally come to the conclusion that the Bank of England should be granted independence, but had been unable to persuade Major of the need for reform.

For some reason, this reminded me that someone very close to Gordon Brown had recently told me that Brown and Lamont had always got on well. 'Yes, I think I always had good relations with Gordon Brown. I've never seen him throw computers across the room or bite his nails. He's always been very straightforward with me.'

Then came an interesting elucidation of something he had alluded to in his memoirs: 'I did go and see Tony Blair and Gordon Brown about making the Bank of England independent. I said: "It is not my job to help the Labour Party, but I think the country needs it and I have failed to persuade the Conservative Party". Tony Blair said: "You don't understand the Labour Party".'

And then, with an old-fashioned gleam in his eye, Lamont said: 'The day before the announcement, Gordon Brown rang me up and said "We've decided to take your advice".'

The former Chancellor had more advice for another former Chancellor: 'Gordon shouldn't underestimate Cameron.' Lamont said of his former speechwriter and political adviser: 'He is remarkably quick and clever.' (We were talking the day before Cameron caught Brown out at his very first Prime Minister's Questions.)

In addition to his membership (with Lord Lawson and others) of the House of Lords Economic Affairs Committee, Lamont has a dozen or so directorships or consultancies that occupy him - including his work for Balli, a private Anglo-Iranian industrial and trading company, which has led to his being chairman of the British-Iranian Chamber of Commerce.

The West's relations with Iran are potentially a somewhat hotter issue than Black Wednesday. Some final advice from Lamont: 'I'm not pro the Iranian government - not pro-theocracy - but war with Iran would be a disaster.'

Over a subsequent lunch, he gave me his strong views about how badly the US has handled dealing with Iran.

He seems fully recovered from the horrors of his final months as Chancellor in 1993, when, as Major says in his memoirs: 'Norman's credibility plummeted... his position was becoming untenable... I had no choice but to make a change.'

But the public may not, even now, have had a similar recovery. As I left the restaurant the former Chancellor hailed a taxi for me. I said to the taxi driver: 'That was Norman Lamont.'

'I know,' came the reply, in rather menacing tones. I could not help wondering whether it was entirely fair that Norman Lamont had become the scapegoat for an entire government.

Life and career

Born in Shetland in 1942, Lamont's career in the Conservative Party began at the Cambridge University Conservative Association, where he became president, and a member of the 'Cambridge Mafia' that included Kenneth Clarke and Michael Howard.

Before entering Parliament he worked for NM Rothschild, the financial services firm, and became director of Rothschild Asset Management.

In 1972 he was elected MP for Kingston upon Thames. His rise to the top began after the 1979 election; during the Thatcher years he had stints at various ministries before, in 1989, becoming Chief Secretary to the Treasury under John Major. Following Thatcher's resignation in 1990, and Major's taking the reins at Number 10, Lamont was promoted to Chancellor.

On 16 September 1992, Black Wednesday, his efforts to defend the pound against currency speculators failed, and sterling's membership of the ERM was suspended.

He would resign as Chancellor in 1993, after which he took a key role in campaigning against the euro. He was made a peer in 1998. In recent months he has called for a complete withdrawal from Iraq and stronger US economic ties with the Middle East.

In his own words

On joblessness

'Rising unemployment and the recession have been the price we have had to pay to get inflation down. That is a price well worth paying.'

On Black Wednesday

'It has been a difficult day.'

On the ERM

'Je ne regrette rien.'

'The ERM prolonged the recession, it did not cause it.'

After France's rejection of the EU constitution in 2005

'The Europe of Delors, Mitterrand and Kohl is dead.'

On the Conservatives

'No one will vote for a party that loathes itself and wants to cut its heroes and heroines down to size.'